Scottish Court of Session Decisions

The factual background to the arguments canvassed at procedure roll debate in this case, and which is evident from the pleadings and the productions lodged, is not subject to any material dispute.

In October 1994 the pursuer was minded to acquire a share holding in the defenders. By letter dated 21 October 1994 (6/1 of process) addressed to Mr O. J. Rolland as a director of "R D Fire Protection Limited/Rolland Decorators Ltd" the pursuer made an offer to subscribe for shares in the defenders. The proper construction of the offer being a matter of contention between the parties it is appropriate to set out the whole terms of the letter, other than the opening and closing salutations:

Beneath the pursuer's signature on that letter is a docquet signed by Mr Rolland "for and on behalf of R D Fire Protection Limited/Rolland Decorators Limited" in which he states that he acknowledges receipt of and agrees the terms of the subscription proposed. The pursuer thereafter paid the first instalment of the price of the shares payable on 1 November 1994 namely £18,750. This is the amount of which the pursuer now seeks repayment in this action.

Following the pursuer's payment of the first instalment the defenders duly submitted to the Registrar of Companies on 29 November 1994 a Return of Allotments of Shares intimating the allotment to the pursuer of 75,000 ordinary £1 shares in the defenders. Although the second instalment payable in respect of the shares for which the pursuer had subscribed fell due on 16 December 1994 it was not paid on that date. It has never been paid.

On 31 December 1994 an allotment of 224,998 shares was made to Rolland Decorators Limited - "R D L" - and a return of that allotment was made to the Registrar of Companies on 9 February 1995 (number 6/3 of process). The defenders' audited accounts for the year to 31 December 1994, lodged with the Registrar of Companies, were approved by the Board of Directors of the defenders on 30 October 1995 (number 6/5 of process). The accounts indicate that at the beginning of the financial year the issued, paid up capital of the company consisted of two shares - evidently the shares initially taken by the two subscribers to the memorandum of association - and that during the year 299,998 shares of £1 each were allotted at the price of £1 each. The share holders of those shares were given as respectively (a) R D L who held 224,998 shares for which the consideration paid was £56,250, the consideration outstanding being £168,748 and (b) the pursuer who held 75,000 shares, the consideration received being £18,750 and the consideration outstanding being £56,250. By at least the time of the adoption of those accounts the pursuer was a director of the defenders. As is evident from the foregoing figures, at 31 December 1994 the extent to which the shares held by the pursuer and R D L respectively were paid up amounted to 25% in each case. That remained the position at the end of the following year - 31 December 1995 - neither the pursuer nor R D L having made any further payment in cash or otherwise in respect of the shares allotted to them on 1 November 1994 and 31 December 1994 respectively.

It is not clear from the materials before the court when the pursuer ceased to hold office as a director of the defenders but the date is not of importance. However, by letter of 3 July 1998 (7/6 of process) the defenders called upon the pursuer to make payment of the balance of £56,250 payable on the shares issued to him (ie. 75p per £1 share). On 20 August 1998, not having received that balance, the defenders intimated that unless payment were made within the ensuing seventeen days the pursuer's shares would be liable to be forfeited in terms of the articles of association (number7/7 of process). No such payment having been made, the directors of the defenders resolved at a meeting on 23 October 1998 that the pursuer's shares should be forfeited.

Against that background the pursuer seeks payment by the defenders of the sum of £18,750. The precise legal basis upon which repayment is sought is not wholly clear from the pleadings. The plea-in-law annexed to the summons is unenlightening. From the averments the claim appears to turn on the terms of paragraph 3 of the agreement and the averment that R D L did not subscribe for 225,000 ordinary shares by 30 June 1995. There is also an averment on behalf of the pursuer that "in the circumstances the pursuer did not subscribe for the shares". However, as I understood it from the oral argument advanced by counsel for the pursuer, the true contention for the pursuer is that the concluding sentence of paragraph 3 of the agreement - "this subscription [R D L subscription] will be finalised on completion of the audit of the company's 1994 Accounts or 30^th June 1995 at the latest" implied that the pursuer's original agreement to subscribe for the shares was wholly conditional not merely upon R D L's agreeing to subscribe for shares in the defenders but also upon R D L's making effective payment of those shares, in full, by 30 June 1995. Therefore, since R D L had not paid up their shares in full by that date - or even later - the condition upon which the pursuer had subscribed for shares in the defenders was not satisfied and he was consequently entitled to the return of the money paid in terms of the agreement. Counsel for the pursuer made plain that no point was being taken about the fact that the 224,998 shares allotted to R D L was two shares short of the number mentioned in the agreement.

In amplification of the contention advanced on behalf of the pursuer his counsel submitted, under reference to Governments Stock and Other Securities Investment Company Limited v Christopher and others [1956] 1 W.L.R. 237 that subscribing for shares was simply a promise to pay money for shares to be allotted and there was no difference in principle between an agreement to subscribe for shares and any other contract. Since Mr Rolland was a director of both R D L and the defenders and the offer was addressed to him in that dual capacity the defenders had notice of the agreement. There were three limbs to the condition in paragraph 3 of the offer namely - (a) R D L were to subscribe for 250,000; (b) they were to pay in the manner indicated that is by "capitalisation of accumulated reserves and/or inter company debts; and (c) the payment, in that manner, was to be effected by 30 June 1995 at the latest. Unless all those conditions were satisfied the defenders were not entitled to enter the pursuer in the register of shareholders and allot shares to him. Since it was clear that condition (c) had not been met, decree de plano should be granted.

Counsel for the defenders moved for dismissal of the action on the grounds of its irrelevancy. In advancing his submission that the pursuer's claim was irrelevant he observed that at the heart of the claim there appeared to be a confusion between the acts of subscribing for shares in a company; the subsequent allotment whereby the offer to take shares was accepted and shares appropriated to the allottee; and the eventual paying up of the shares. Paying up the shares was separate from the acts of subscribing and allotment. Although Section 101 of the Companies Act required shares in the public company to be paid up to the extent of 25%, a private company could issue shares with nil paid up. It was clear that the condition that R D L undertake to subscribe for shares had been satisfied since the relevant number of shares (leaving aside the two original shares taken by the signatories to the memorandum) had been allotted on 31 December 1994. On any view therefore the subscription by R D L was completed or finalised by 31 December 1994. It did not matter that paying up the shares might take place at a later time. Counsel also submitted that it was appropriate in construing paragraph 3 of the agreement to have regard to paragraph 4 which envisaged the methods of paying up as being dependent on the eventual state of the audited accounts for the year to 31 December 1994. Auditing of those accounts would inevitably take place later than 31 December 1994 and the agreement therefore plainly had in mind that payment would not be contemporaneous with the allotting of the shares.

Counsel for the defenders further submitted that in any event the monies paid by the pursuer in terms of the agreement were paid as part of his contribution to the share capital of the company. The 75,000 shares had been issued to the pursuer and appropriate returns made to the registrar of the company. The accounts lodged with the registrar showed the pursuer as a member of the company to that extent. It was not open to a company to repay capital to shareholders otherwise than by means of a reduction of capital duly voted on by the members of the company in general meeting and approved by the court in terms of the Companies Act 1985.

In my opinion the argument which must prevail is that advanced by the defenders.

In the first place, while the draughtsmanship of the contract upon which the action is based is no doubt not ideal, I do not consider that the terms of the letter of 21 October 1994 may properly be construed as making the pursuer's offer to subscribe for shares in the defenders conditional on more than the making by R D L of an offer to subscribe for the stated number of shares in the defenders. It appears to me that the essential words of condition attaching to the pursuer's offer are those contained in the first sentence of paragraph 3 which states that - "it is a condition of my subscription that [R D L] ... also undertakes to subscribe for 225,000 ordinary shares of £1 each in the company." The sentence which follows is one which in effect records the pursuer's acknowledgement that the consideration for the shares to be issued to R D L may take a form other than cash. It does not contain any words of conditionality. Although the precise meaning of the final sentence of paragraph 3 may not be readily apparent the nature of that sentence is, in my view, similar to the preceding sentence in that it likewise does not contain any words of conditionality which refer back to the pursuer's offer to subscribe so as to subject that offer to a further suspensive, or even resolutive, condition. The approach adopted by counsel for the pursuer involved however the elevation of that term of the contract into a condition of a suspensive nature.

That apart, I have difficulty in seeing that the word "finalise" employed in the final sentence of paragraph 3 can have a meaning materially different from the word "completed" which is used also as regards "subscription" in paragraph 4. Treating "completion of a subscription" as meaning the achieving of the stage of allotment of shares - its more natural meaning - enables better sense to be made of paragraph 4. I therefore think that counsel for the defenders was correct in interpreting the reference in the concluding sentence of paragraph 3 to finalisation of the subscription as meaning simply the allotment of the shares to R D L.

Accordingly I reject the submission for the pursuer that the pursuer's offer to become a member of the defenders by subscribing for the shares was subject to a condition that R D L should not only subscribe but also pay in full by 30 June 1995.

I would add the further observation that the interpretation that which counsel for the pursuer sought to advance involved, as I have already indicated, the propositions (i) that the defenders could not allot shares to the pursuer until the consideration in respect of the shares to be allotted to R D L had actually been provided in full and (ii) further, that the provision of that consideration could be delayed until 30 June 1995. Such a suspensive condition would thus mean that the pursuer's subscription could not on any view be said to be "completed" prior to the event of the provision of that consideration in full. That would appear to me to have the consequence that the salary benefits in Clause 6 would be subject to that suspensive condition notwithstanding that the pursuer had already paid up the sum of £75,000 by 31 December, that sum being somehow held, in some unspecified way, on deposit or in abeyance within the defenders' accounts. On the face of matters it seems to me highly unlikely that a person in the position of the pursuer would have been agreeable to such an arrangement.

The further difficulty facing the pursuer is that the sum paid by him was paid in respect of shares which were in fact allotted to him. He in fact became a member - and indeed a director - of the defenders. What is now being asked of the defenders is that they make repayment to the pursuer of part of the share capital contributed by him. As counsel for the defenders pointed out, a company cannot repay capital contributed by shareholders otherwise than in accordance with the provisions of Chapter IV of the Companies Act 1985. In response to this point counsel for the pursuer simply submitted that this was the defenders' problem. He said that they had created this particular difficulty by allotting shares to the pursuer when the terms of the agreement of 21 October 1994 did not permit them to do so. They had acted in breach of contract in allotting shares to the pursuer and permitting him to become a member of the company.

Without further comment on that response it is sufficient for me to say that if the pursuer's position were that he had been wrongly entered as a member of the company some other form of remedy would need to be employed to achieve rectification of the registers and so overcome the otherwise insurmountable objection to the claim advanced by the pursuer. Whether such a remedy may yet be open, particularly given that the pursuer served as a director following his becoming a shareholder and his admitted lack of response to the share forfeiture procedure, is a matter upon which I express no view.

I am satisfied that the claim advanced by the pursuer in these proceedings is irrelevant and I shall therefore dismiss the action by upholding the first plea-in-law for the defenders.